Funds to Buy for a Slow Economy

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The best funds to buy when the economy is slowing include certain mutual funds and exchange-traded funds (ETFs) that tend to perform well just before and during an economic recession. Broadly diversified funds and defensive sectors can be smart investments to buy in this environment.

When the economy begins to slow down, it doesn't mean that investors should begin to abandon their long-term investment strategies and sell out of their stock funds. There are, however, smart ways to prepare your portfolio for challenging economic times.

Where to Invest When the Economy Is Slowing

The economy goes through various stages, which are part of the business cycle, sometimes referred to as the economic cycle. The four phases include:

  1. The Early-Cycle Phase, where the economy and markets are recovering from a ​recession. 
  2. The Mid-Cycle Phase, where the economy is moderating.
  3. The Late-Cycle Phase, where the economy is growing faster but inflation and stock prices are getting dangerously high.
  4. Recession, when the economy, as measured by Gross Domestic Product (GDP), is shrinking and stock prices are falling.

If you want to invest during a slowing economy, a good strategy (for long-term investors) can be to remain exposed to stocks but begin to get defensive. This will ensure that you can take advantage of rising stock prices but also avoid the biggest declines of the coming bear market by avoiding the riskiest areas of the market. To do this, consider buying into sectors, such as health, utilities, and consumer staples. Investors may also consider precious metals funds or certain bond funds.

5 Best Funds to Buy for a Slowing Economy

The best mutual funds and ETFs to buy for a slowing economy will include a range of sector funds that provide broad diversification when combined into one portfolio. These funds will also have key attributes of the best funds to buy, which for most investors will be no-load funds with low expense ratios. This portfolio may then consist of index funds and sector ETFs.

With that backdrop in mind, and in no particular order, here are 5 of the best funds to buy for a slowing economy:

  1. Healthcare Select Sector SPDR (XLV): People still need to see the doctor and buy their medication, no matter what the economy is doing. For this reason, health stocks tend to be somewhat insulated from a maturing economy in the late-cycle phase. XLV is an ETF that holds high-quality large-cap US stocks like Johnson & Johnson (JNJ) and United Health Group (UNH). Expenses for XLV are just 0.13 percent or $13 for every $10,000 invested.
  2. Utilities Select Sector SPDR (XLU): For similar reasons health stocks can hold up better than other sectors in a slowing economy, utility stocks can be smart defensive holdings. Consumers are still paying for their utilities, such as gas and electric, during economic slowdowns. XLU holdings are large US energy firms like Duke Energy (DUK) and NextEra Energy (NEE). Expenses for the XLU ETF are 0.13 percent.
  3. Consumer Select Sector SPDR (XLP): If you want a fund that provides broad exposure to consumer non-discretionary stocks, XLP is a quality ETF to get the job done. Non-discretionary means that consumers buy the products for their everyday life and may not have much of a choice (discretion) about the purchase. These products include food, beverages, and toiletries. Stocks included in XLP are Proctor & Gamble (PG) and Coca-Cola (KO). Expenses for XLP are 0.13 percent.
  4. SPDR Gold Shares (GLD): A slowing economy often leads to volatility and uncertainty in capital markets. This often leads investors to move some of their assets into physical assets and investments that track their prices. Precious metals, especially gold, can benefit in this environment. Although GLD does not hold physical gold, it does track the price of gold bullion. Expenses for GLD or 0.13 percent. 
  5. Vanguard Ultra-Short Term Bond (VUBFX): This mutual fund invests money market instruments and bonds with durations of 0-3 years. Buying an ultra-short-term bond fund in a slowing economy can be beneficial because interest rates are often rising in this environment and bond funds with longer durations tend to see lower or negative price movement. Expenses for VUBFX are 0.20 percent.

The most important point to remember about investing in a particular economic environment is to diversify assets, which means don't put all of your eggs in one basket. Not even the most seasoned investors and economists can accurately predict what the market will do over the short term.